How to use my PPP
May 23, 2020
As I write this on Friday, May 1, there is lots of talk but still no final written procedure on using your PPP funds and how to make sure the loan is forgiven. Let's say you're one of the fortunate business owners who have received your PPP money. What do you do with it? How do you spend the money, and what do you do with money so that you can make sure you don't have an outstanding loan at the end of the eight-week period?
The CARES Act gave us funding for the Paycheck Protection Program, better known as the PPP. The intent of this program was primarily to keep employees on payroll. It was set up so employers, who might otherwise have to lay people off, could keep their employees working. The first round of funding went to 2 percent of the applicants as there was a loophole that allowed it to apply to franchises and some public companies, so about 25 percent of the money in the first round went to 2 percent of the applicants. This first round emptied the fund and left the small guy empty-handed. Most of the money went to the big players that generally would not meet the SBA's standards as a small business. Some of the smaller players are getting money now, and I have clients who have reported receiving money. Changes have been made, and many of the big-name, first-round recipients returned the money to the program.
The question is, once you receive the money, what do you do with it? How do you use it to maximize the benefits and make sure the debt will be forgiven? Remember, what you receive is a loan based on two and a half months of payroll expenses. The rule is that you have eight weeks to spend this money, and the clock starts ticking the day you receive it. First of all, you need to know that the SBA has written the regulations for this program. Normally the SBA acts as administrators; they are not lawmakers, but under the CARE Act, they were directed to create this legislation, so whatever they say will go. One of the things they said was that 75 percent of the money you receive has to be spent on payroll expenses.
Payroll is very broadly defined and includes your health care costs, commissions that you've paid, retirement, taxes and other associated expenses. It includes everything you paid for and on behalf of the employee.
75-25 Rule: With 75 percent of the money to be spent on payroll expenses, up to 25 percent can be spent on business continuity expenses, and the loan will be forgiven.
We don't have regulations outside of the 75-25 rule, and we don't have final rules from the Treasury or from the SBA on what they're going to forgive. Here's what we do know: The general rule is that from the time you receive the loan, you have eight weeks to spend the money. You start out by documenting the date when you receive the loan. That will be day one of your eight-week period. The rule is that you can spend it on several different things. You can spend it all on payroll, you could also spend it on utilities, you can spend it on rent and you can spend it on interest for business loans. Anything other than direct payroll expenses are limited to 25 percent of the total if it's to qualify for forgiveness. Another easy way to remember this is your "other" expenses cannot be more than one third of your payroll costs. The question that comes up is, I laid off my employees, or they don't want to come back to work, what do I do? It doesn't matter when the employees were hired so you can hire the old employees back or new ones in the middle of that eight-week period. Both are okay. What you can't do is you can't pay yourself a big bump in salary. There is a $100,000 a year rule you have to maintain that says any one individual can't be paid more than what equates to a $100,000 annual salary.
Let's say that you are a restaurant owner and you have huge rent, and you don't really want to bring all your employees back; you will have to be extra careful that you don't violate this rule. For example, could you bring back only your management? I know of an owner of a restaurant that, in order to take care of this, they're going to bring back management to do repairs and deferred maintenance that was planned for later in the year.
They still have a lot of rent and utilities to cover, even though they're just open for takeout. So, they need to be extra careful of what that 25 percent number is and make sure that they use it up but don't exceed it if they want it to be forgiven. Remember, this is a loan with the first six months deferred. Yes, it's only 1 percent interest, but if you could have it forgiven, why wouldn't you?
I don't think it's as complicated as people are making it out to be. Keep good records, make calculations and update your numbers as you spend the money. Some ask, "should I bring some people back now?" "What about bonuses, can I pay bonuses?" The answer is yes; you can pay bonuses, and again it's up to $100,000 a year annual salary.
Be careful of the pay periods. Wages are usually paid in arrears, not advanced. You want to make sure the final pay period is within the eight weeks, not after. If you pay bi-weekly, you may need to make a "special" payroll before the last day of the eight-week period depending on your start date. You need to work with your payroll company to make sure that everything is set up properly, and you don't violate the rules. What about retirement? Normally, retirement contributions are made at the end of the year or right after the end of the year.
What you need to do is talk to your plan administrator about how much money to contribute for the eight-week period to have it included in the program. There are some critical details here to pay attention to, so make absolutely sure you understand it.
The idea should be not just to use all your PPP up, but to use it for things that will be productive and profitable for your business. Remember, in business, all expenses should create income, and all income should create cash flow, so don't do anything that's not going to create income even though it's money that the government is giving you. Please don't waste it! This money is a real opportunity to do something good for your business. Just like my friend, who owns the restaurant. He's getting it put in great shape so that when he's able to reopen up, he'll be ready to go. Keep looking at how you can make your business stronger. The businesses that prove to be successful in these downtimes will be better and stronger than ever in the coming good times!
Jay Thompson is the president of Golden Empire Services LLC and a Business Consultant with the CSU Bakersfield Small Business Development Center. The CSUB SBDC provides premium, one on one, no cost consulting to small business owners in Kern, Inyo and Mono Counties. For more information visit their website at http://www.csubsbdc.com.